THE IMPACT OF CBN CURRENT REFORMS ON THE NIGERIA BANKING SECTOR (A CASE STUDY OF UNION BANK PLC IN ENUGU METROPOLIS)
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THE IMPACT OF CBN CURRENT REFORMS ON
THE NIGERIA BANKING SECTOR (A CASE STUDY OF UNION BANK PLC IN ENUGU METROPOLIS)
Abstract
The national
apex bank, the central bank of Nigeria (CBN), since its establishment in 1958
has been preoccupied with the goals of ensuring the smooth running and
satisfactory performance of the banking sector so as to enable it perform its
leading role in the entire financial sector of promoting economic growth and
international acceptability of the Nigerian banking practice. To achieve these
goals, policies and subsequent reforms were promulgated. Some of the reforms
were over-reaching and counter to each other. As a result, it has not been easy
for the financial analysts to make good assessment of the impact of these
reforms on the banking sector. Burning with the seal to crack this puzzle, the
researcher chose this topic “The impact of CBN Reforms on the Nigeria Banking
Sector (a case study of Union Bank Plc in Enugu metropolis)”. The information
for the study was collected using primary and secondary methods of data
collection. For the primary data collection, questionnaires, personal
observations and oral interviews were used while existing literature relevant
to the topic was consulted for the secondary data. The researcher used
chi-square statistical model to analyze the data. Two major findings were made:
CBN current reforms have a significant impact on the Nigeria banking sector.
High proportion government borrowing from banks instead of capital market tends
to push up lending rate. Two major recommendation were proffered, viz
government has to borrow more from the capital market than banks so as not to
whip up lending rates, and banks should not focus on opening more branches and
acquiring more assets but should, instead, discourage handing of cash in favour
of automation of banking operations. The researcher suggested possible
extension to the study by looking into the effect of insurance and capital
market reforms on the economic growth.
TABLE OF
CONTENT
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Economic
growth has long been considered an important goal of economic policy with a
substantial body of research dedicated to explaining how this goal can be
achieved. Most of the empirical studies have focused on explanatory variables
selected on the basis of their relevance to policymakers or because of other
theoretical predictions. See for instance, Barro 1991; Levine and Renelt 1992.
However,
while most prior empirical studies have focused on economic and non economic
determinants of growth in developed and developing economies, there has been
very little study focusing on the relationship between the banking sector and
economic growth in developing economies. The handful of studies undertaken has
focused on transition economies of central and eastern European and the
Baltics. Tuuli (2002) explained that although there has been numerous empirical
studies on the determinants of growth in transition economies “the relationship
between financial markets and economic growth, however, has largely been ignored.
To our knowledge, the only study that empirically tests the relation between
financial markets and economic growth in transition countries is Drakos’s
(2002) paper on the effects of banking sector’s structure on economic
performance.” Tuuli’s (2002) study however has some shortfalls: it equates
financial sector reforms with banking sector reforms; it uses unbalanced panel
data from 25 transition countries as variables which were either not always
available or were unavailable for identical periods for each country, and it
ignores structural differences amongst the countries.
In Nigeria,
the only empirical study of the relationship between the banking sector and
economic growth is Balogun’s (2007) paper on banking sector reforms and the
Nigerian economy. There are, however question marks around the paper’s use of
certain parameters in its model specification. For example, given multiple
channels of accessing banking services such as internet banking; telephone
banking; mobile banking; and use of automated teller machines; the relevance of
the number of bank branches as a determinant of economic growth is uncertain.
Secondly, the paper makes use of lending rates, savings rates and exchange
rates as explanatory variables. Tuuli (2002), however assert that rather than
use lending and/or savings rates, interest rate margins (i.e. the difference
between savings and lending rates), are “a good estimator for efficiency in the
banking
sector as it
describes transactions costs within the sector”. Also, Elbadawi (1992) found
that high exchange rate premiums (i.e. the difference between the parallel and
official market exchange rates), lead to lower revenue generation from official
exports, increased difficulties in controlling inflation and an acceleration of
capital flight.
As a result,
there remains a gap in understanding the causal relationship between banking
reforms and economic growth in developing economies. Focusing on the Nigerian
economy, a country whose banking industry has witnessed a large number of reforms
in a relatively short time, the aim of this paper is to attempt to rectify this
gap in economic literature by investigating whether recent banking sectors have
had any effect in stimulating economic growth in Nigeria.
Based on
theoretical considerations, annual time series data from 1999 – 2009 will be
used to develop econometric models that capture the interrelationship between
the country’s economic growth over this period, and relevant parameters. Policy
directions aimed at stimulating sustainable economic growth and an agenda
intended to implement the outcome of this study will thereafter be recommended.
We conduct
section 1 with a brief overview of developments within the Nigerian banking
sector. A short review of relevant literature and discussion of the theoretical
framework is undertaken in section 2. Data sources and econometric models are
specified in section 3. Section 4 presents the outcome of the data analyses
while section 5 suggests policy recommendations on the basis of the outcome of
our analyses and suggests possible extension to the study.
1.2 STATEMENT OF THE PROBLEMS
Absence of
policies and regulations in any human endeavour culminates in chaos and
eventual failure. In similar vein, when there are policies and regulations and
they fail to achieve the objectives for which they are formulated, the
signification is malfunction.
Reforms are introduced when the
aforementioned scenarios prevail. The first scenario held sway prior to 1958
when the central Bank of Nigeria was established by virtue of the central Bank
Act of 1958.
The problem seemed to persist and,
consequently in recent times, the CBN subjected the banking sector to a spate
of reforms in quick succession which blured the proper evaluation of their
effect, and there arose, as a result, the problem and the need to properly
determine the impact of the reforms on the Nigeria banking sector with
particular reference to union Bank of Nigeria Plc in Enugu Metropolis.
Other problematic issues that need to be
addressed are:
1. The relevance of CBN current reforms in the
economic growth of Nigeria.
2. The extent to which the reforms have been
implemented in the banking sector.
3. The determination of the influence of CBN
current reforms on the financial performance of union bank plc.
Existing
literature revealed that before the establishment of the Central Bank of
Nigeria in 1958, there were about 185 banks and majority of them failed. After
the establishment of the Central Bank, the apex bank came up in quick
succession with a lot of regulations and counter-regulations which made it
uneasy for the analysts to [properly determine their impacts. Hence, the
question; what are the impacts of CBN current reforms on the Nigeria banking
sector? There exist other problems that relate to the one above which the researcher
has the burning desire to address.
1.3
OBJECTIVE OF THE STUDY
The purpose
of this study is to evaluate the impact of CBN current reforms on the Nigerian
banking industry with
particular
reference to Union bank Plc in Enugu metropolis. Some other objectives of this
study are:
1. To determine the relevance of CBN current
reforms in economic growth of Nigeria.
2. To assess the impact of the current reforms
in Nigerian banking sector.
3. To determine how the reforms have is been
implemented in the banking sector.
4. To determine the influence of CBN current
reforms on the financial strength of Union bank plc.
1.4 RESEARCH
QUESTION
The
following research questions were formulated in this research work:
1. What are the relevance of CBN current reforms
in the economic growth of Nigeria?
2. What are the impact of CBN current reforms on
Nigerian banking sector?
3. How have the current reforms been implemented
in the banking sector?
4. What are the influences of CBN current
reforms on the profitability of Union bank plc?
1.5 RESEARCH
HYPOTHESIS
For the
purpose of the study, the following hypotheses were formulated:
HYPOTHESIS
ONE
Ho: CBN
current reforms do not have any impact in Nigerian banking sector.
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